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EX-31.1 - CERTIFICATION - VIASPACE Green Energy Inc.vge_10q-ex3101.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


x
Quarterly Report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934
   
 
For the quarterly period ended June 30, 2011

or

o
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
   
 
For the transition period from _________________ to _________________

Commission File Number 333-159717

VIASPACE GREEN ENERGY INC.
(Exact name of small business issuer as specified in its charter)

 
British Virgin Islands
Not Applicable
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
2102 Business Center Drive, Suite 130, Irvine, CA  92612
(Address of principal executive offices)

(626) 768-3360
(Issuer’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES x  NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES x  NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
 
Accelerated filer o
       
Non-accelerated filer o   (Do not check if a smaller reporting company)
 
Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  YES o  NO x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  8,600,000 shares of $0.001 par value common stock issued and outstanding as of August 12, 2011.



 
 
 

VIASPACE GREEN ENERGY INC.

INDEX
FISCAL QUARTER ENDED JUNE 30, 2011
 
 
 
     
Page
Part I.
Financial Information
   
       
Item 1.
Financial Statements
   
 
Consolidated Balance Sheets as of June 30, 2011 (Unaudited) and December 31, 2010
 
3
 
Consolidated Statements of Operations For the Three and Six Months Ended June 30, 2011 and 2010 (Unaudited) and Consolidated Statements of Comprehensive Income (Loss) For the Three and Six Months Ended June 30, 2011 and 2010 (Unaudited)  
 
4
 
Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2011 and 2010 (Unaudited)
 
5
 
Notes to Consolidated Financial Statements June 30, 2011 (Unaudited) and December 31, 2010
 
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
15
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
19
Item 4.
Controls and Procedures
 
19
       
Part II.
Other Information
   
       
Item 1.
Legal Proceedings
 
20
Item 1A.
Risk Factors
 
20
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
21
Item 3.
Defaults Upon Senior Securities
 
21
Item 4.
Submission of Matters to Vote of Security Holders
 
21
Item 5.
Other Information
 
21
Item 6.
Exhibits
 
21
       
Signatures
   
22
 
 
 
 
 
 
 

 
   
PART I – FINANCIAL INFORMATION
   
ITEM 1.  FINANCIAL STATEMENTS
   
VIASPACE GREEN ENERGY INC.
CONSOLIDATED BALANCE SHEETS

   
(Unaudited)
       
   
June 30,
   
December 31,
 
   
2011
   
2010
 
ASSETS
           
CURRENT ASSETS:
           
Cash and equivalents
 
$
607,000
   
$
114,000
 
Accounts receivable, net of allowance for doubtful accounts
   
508,000
     
303,000
 
Inventory
   
584,000
     
551,000
 
Prepaid expenses
   
41,000
     
33,000
 
Related party receivables
   
1,395,000
     
1,377,000
 
Other current assets
   
47,000
     
58,000
 
TOTAL CURRENT ASSETS
   
3,182,000
     
2,436,000
 
                 
FIXED ASSETS, net of accumulated depreciation
   
973,000
     
993,000
 
                 
OTHER ASSETS:
               
Land Use Right, net of accumulated amortization
   
538,000
     
558,000
 
License to Grass, net of accumulated amortization
   
440,000
     
453,000
 
Goodwill
   
12,322,000
     
12,322,000
 
Other
   
812,000
     
812,000
 
TOTAL OTHER ASSETS
   
14,112,000
     
14,145,000
 
                 
TOTAL ASSETS
 
$
18,267,000
   
$
17,574,000
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
CURRENT LIABILITIES:
               
Accounts payable
 
$
657,000
   
$
278,000
 
Related party payables
   
97,000
     
32,000
 
Accrued expenses
   
73,000
     
106,000
 
TOTAL CURRENT LIABILITIES
   
827,000
     
416,000
 
                 
COMMITMENTS AND CONTINGENCIES (Note 9)
               
                 
STOCKHOLDERS’ EQUITY:
               
Common stock, $0.001 par value, 50,000,000 shares authorized, 8,600,000 issued and outstanding in 2011 and 2010
   
9,000
     
9,000
 
Additional paid in capital
   
17,946,000
     
17,682,000
 
Accumulated comprehensive income
   
37,000
     
25,000
 
Accumulated deficit
   
(552,000
)
   
(558,000
)
Total stockholders’ equity
   
17,440,000
     
17,158,000
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
18,267,000
   
$
17,574,000
 
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
3

 
 
VIASPACE GREEN ENERGY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME (LOSS)
(Unaudited)

   
(Unaudited)
Three Months Ended
June 30,
   
(Unaudited)
Six Months Ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
REVENUES
  $ 2,778,000     $ 620,000     $ 3,312,000     $ 1,377,000  
COST OF  REVENUES
    1,906,000       407,000       2,323,000       939,000  
GROSS PROFIT
    872,000       213,000       989,000       438,000  
                                 
OPERATING EXPENSES
                               
Operations
    56,000       28,000       86,000       49,000  
Selling, general and administrative
    480,000       421,000       919,000       751,000  
Total operating expenses
    536,000       449,000       1,005,000       800,000  
                                 
INCOME (LOSS) FROM OPERATIONS
    336,000       (236,000 )     (16,000 )     (362,000 )
                                 
OTHER INCOME (EXPENSE)
                               
Other expense
                (1,000 )     (1,000 )
Other income
    4,000       14,000       23,000       138,000  
Total other income (expense)
    4,000       14,000       22,000       137,000  
                                 
INCOME (LOSS) BEFORE INCOME TAXES
    340,000       (222,000 )     6,000       (225,000 )
Income taxes
                       
                                 
NET INCOME (LOSS)
  $ 340,000     $ (222,000 )   $ 6,000     $ (225,000 )
                                 
NET INCOME (LOSS) PER SHARE OF COMMON STOCK - Basic and diluted
  $ 0.03     $ (0.03 )   $ *     $ (0.03 )
                                 
WEIGHTED AVERAGE SHARES OUTSTANDING - Basic and diluted
    9,950,000       8,600,000       9,950,000       8,600,000  
_____________                                
*  Less than $0.01 per common share.
                               
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
    2011     2010     2011     2010  
NET INCOME (LOSS)
  $ 340,000     $ (222,000 )   $ 6,000     $ (225,000 )
                                 
Other Comprehensive Income:
                               
Foreign currency translation
    7,000             12,000        
Subtotal
    7,000             12,000        
                                 
COMPREHENSIVE INCOME (LOSS)
  $ 347,000     $ (222,000 )   $ 18,000     $ (225,000 )
 

The accompanying notes are an integral part of the consolidated financial statements.
 
 
4

 
 
VIASPACE GREEN ENERGY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
Six Months Ended
June 30,
 
   
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES:
             
Net income (loss)
 
$
6,000
   
$
(225,000
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
               
Depreciation
   
44,000
     
39,000
 
Amortization
   
21,000
     
20,000
 
Stock option compensation
   
223,000
     
112,000
 
Gain on disposal of fixed assets
   
  ―
     
(15,000
)
(Increase) decrease in:
               
Accounts receivable
   
 (325,000
)
   
115,000
 
Inventory
   
(32,000
)
   
(140,000
)
Related party receivable
   
43,000
     
(145,000
)
Prepaid expenses
   
(7,000
)
   
19,000
 
Other current assets
   
118,000
     
(112,000
)
Increase (decrease) in:
               
Accounts payable
   
375,000
     
(5,000
)
Related party payable
   
23,000
     
(70,000
)
Accrued expenses
   
16,000
     
(32,000
)
Net cash provided by (used in) operating activities
   
505,000
     
(439,000
)
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Additions of fixed assets
   
(24,000
)
   
(130,000
)
Additions of land use rights
   
     
(13,000
)
Proceeds from disposal of vehicle
   
     
17,000
 
Net cash used in investing activities
   
(24,000
)
   
(126,000
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES
   
  ―
     
  ―
 
                 
EFFECT OF EXCHANGE RATE CHANGE ON CASH AND EQUIVALENTS
   
12,000
     
 
                 
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS
   
493,000
     
(565,000
)
CASH AND EQUIVALENTS, Beginning of period
   
114,000
     
984,000
 
CASH AND EQUIVALENTS, End of period
 
$
607,000
   
$
419,000
 
                 
Supplemental Disclosure of Cash Flow Information:
               
Cash paid during the period for:
               
Interest
 
$
   
$
 
Income taxes
 
$
   
$
 
    
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
5

 
 
VIASPACE GREEN ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011 (Unaudited) and December 31, 2010 (Audited)
     

NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business – VIASPACE Green Energy Inc., a British Virgin Islands (“BVI”) international business company (“we”, “us”, “VGE” or the “Company”) is the parent company of Inter Pacific Arts Corporation, a BVI international business company (“IPA BVI”) and Guangzhou Inter Pacific Arts, a Peoples Republic of China (“PRC”) company (“IPA China”).  IPA China is a wholly-owned foreign enterprise headquartered in Guangdong province of China.  IPA BVI owns all equity interests of IPA China.  IPA BVI and IPA China specialize in the manufacturing of high quality, copyrighted, framed artwork sold in US retail chain stores. IPA China also has a sublicense to a fast-growing, high yield, low carbon, nonfood energy crop called Giant KingTM Grass (“GKG”) which can be burned in 100% biomass power plants to generate electricity; made into pellets that can be burned together with coal to reduce carbon emissions from existing power plants; generate bio methane through anaerobic digestion, and can be used as a feedstock for low carbon liquid biofuels for transportation, biochemicals and bio plastics.  Cellulosic ethanol, bio butanol and other liquid biofuels, collectively called Grassoline, do not use corn or other food sources as feedstock.  GKG can also be used as animal feed. GKG and other plants absorb and store carbon dioxide from the atmosphere as they grow. When they are burned, they release the carbon dioxide back into the atmosphere, but it is the same carbon dioxide that was removed from the atmosphere, and that the process is carbon neutral. Small amounts of fossil fuel are used by the farm equipment, transportation of  GKG and fertilizer, so the overall process has some carbon dioxide emissions, but much lower than burning coal or other fossil fuels directly.   GKG has been independently tested by customers and been shown to have excellent energy content, very high bio methane production, and high potential for biofuels and biochemicals.

We are growing GKG on approximately 280 acres of leased land in China to serve as a nursery to provide seedlings for large bioenergy projects, a demonstration plantation for potential partners and customers to visit, to provide samples for testing by potential customers, and as a grass source for our own Green LogTM product.   VGE is headquartered in California with business activities in China.

Company History – VGE was formed on July 1, 2008.  Prior to October 21, 2008, VGE was 100% owned by VIASPACE Inc. (“VIASPACE”) and had no active operations.   On October 21, 2008, the majority shareholder of IPA BVI and IPA China, Sung Hsien Chang (“Chang”), entered into a Securities Purchase Agreement (the "Purchase Agreement") with VGE, VIASPACE and China Gate Technology Co., Ltd., a Brunei Darussalam company ("Licensor").  Under the Purchase Agreement, VGE acquired 100% of IPA BVI and the entire equity interest of IPA China from Chang.  In exchange, VIASPACE agreed to pay approximately $16 million in cash and newly-issued shares of VIASPACE and VGE stock.  In addition, VIASPACE issued shares of its common stock to Licensor for Licensor’s sublicense of certain grass technology to IPA China.  As of June 30, 2011 and December 31, 2010, VIASPACE owns 75.6% and 75.7%, respectively, of the outstanding common shares of VGE.

Basis of Presentation – The accompanying unaudited consolidated financial statements of the Company were prepared in accordance with United States generally accepted accounting principles (“US GAAP”) for financial information and with Securities and Exchange Commission (“SEC”) instructions to Form 10-Q.  Accordingly, the unaudited financial statements do not include all of the information and footnotes required by US GAAP.  Operating results for the six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2011.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K, for the year ended December 31, 2010 filed with the SEC on March 31, 2011.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been reflected in these interim financial statements.  All significant intercompany accounts and transactions have been eliminated on consolidation.  Certain reclassifications were made to the June 30, 2010 consolidated financial statements, to conform to the June 30, 2011 consolidated financial statement presentation.

Principles of Consolidation – VGE owns 100% of IPA BVI and IPA China and accounts for these subsidiaries by consolidation.  Under this method, an affiliated company’s results of operations are reflected within the Company’s consolidated statement of operations. Transactions between consolidated affiliated companies are eliminated in consolidation. The Company adopted “Business Combinations”, codified in FASB ASC Topic 805, which requires use of the purchase method for all business combinations.
 
Fiscal Year End – The Company’s fiscal year ends December 31.

Use of Estimates in the Preparation of the Financial Statements – The preparation of financial statements, in conformity with US GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
 
 
 
6

 

Cash and Cash Equivalents – The Company considers all highly liquid debt instruments, purchased with an original maturity of three months or less, to be cash equivalents.

Concentration of Credit Risk – The Company’s financial instruments that are exposed to credit risk consist primarily of cash equivalents, accounts receivable and related party receivable. The Company maintains all of its cash accounts with high credit quality institutions. Such balances with any one institution may exceed FDIC insured limits.
   
Accounts Receivable Allowance for Doubtful Accounts The allowance for doubtful accounts relates to specifically identified receivables that are evaluated individually for collectability.  We determine a receivable is uncollectible when, based on current information and events, it is probable that we will be unable to collect amounts due according to the original contractual terms of the receivable agreement, without regard to any subsequent restructurings. Factors considered in assessing collectability include, but are not limited to, a customer’s extended delinquency, requests for restructuring and filings for bankruptcy.  

Inventory - Inventory is stated at the lower of cost or market.  Cost is determined using the average cost method.  Market is determined using net realizable value.  The Company writes down its inventory for estimated obsolescence, excess quantities and other factors in evaluating net realizable value.

The following is a summary of inventory at June 30, 2011:

   
Raw
Materials
   
Finished
Goods
   
Total
 
Framed-Artwork
 
$
497,000
   
$
   
$
497,000
 
Grass
   
78,000
     
9,000
     
87,000
 
Total
 
$
575,000
   
$
9,000
   
$
584,000
 

The following is a summary of inventory at December 31, 2010:

   
Raw
Materials
   
Finished
Goods
   
Total
 
Framed-Artwork
 
$
460,000
   
$
   
$
460,000
 
Grass
   
78,000
     
13,000
     
91,000
 
Total
 
$
538,000
   
$
13,000
   
$
551,000
 

Property and Equipment Property and equipment are stated at cost, net of accumulated depreciation. Expenditures for maintenance and repairs are expensed as incurred; additions, renewals and betterments are capitalized.  When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets and estimated lives as follows:
    
Building
20 to 30 years
Machinery and equipment
10 years
Office equipment
5 years
Vehicles
5 years
Computers
3 years
    
Land Use Right – All land in the PRC is government owned and cannot be sold to any individual or company.  IPA China acquired land use rights for the land occupied by its manufacturing facility in 2005.  As of June 30, 2011, VGE has land use rights of approximately 113 hectares, or 280 acres in Guangdong province of the PRC.

License – IPA China has a worldwide license for a fast-growing, high yield, low carbon, nonfood energy crop called GKG which can be burned in 100% biomass power plants to generate electricity; made into pellets that can be burned together with coal to reduce carbon emissions from existing power plants; generate bio methane through anaerobic digestion, and can be used as a feedstock for low carbon liquid biofuels for transportation.  IPA China sublicensed this right from China Gate Technology Co., Ltd. which obtained the original license from the inventor.  IPA China did not directly pay for the license.  VIASPACE issued shares of its common stock to Licensor upon the acquisition of IPA China by VIASPACE and VGE on October 21, 2008 to pay for the license. 

Intangible Assets - The Company’s intangible assets consist of a license to GKG.  All intangible assets are subject to impairment tests on an annual or periodic basis.  The impairment test consists of a comparison of the fair value of the intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss in an amount equal to that excess is recognized. Amortizing intangibles are currently evaluated for impairment using the methodology set forth in “Accounting for the Impairment or Disposal of Long-Lived Assets”, codified in FASB ASC Topic 360.

 
7

 
 
Goodwill - Goodwill represents the excess of the cost of an acquisition over the fair value of the Company’s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill is measured at cost less accumulated impairment losses. Goodwill is not amortized but tested for impairment annually and whenever impairment indicators require. Goodwill is tested for impairment annually or more frequently if an event or circumstance indicates that an impairment loss may have been incurred. Application of the goodwill impairment test requires judgment by management using a discounted cash flow methodology. This requires us to use significant judgment including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, the useful life over which cash flows will occur, determination of our weighted average cost of capital and relevant market data.

Impairment of Long-lived Assets - The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may no longer be recoverable. If the estimated future cash flows (undiscounted and without interest charges) from the use of an asset are less than the carrying value, a write-down would be recorded to reduce the related asset to its estimated fair value. For purposes of estimating future cash flows from impaired assets, the Company groups assets at the lowest level from which there is identifiable cash flows that are largely independent of the cash flow of other groups of assets. There have been no impairment charges recorded by the Company.

Fair Value of Financial Instruments - “Disclosures about Fair Value of Financial Instruments,” codified in FASB ASC Topic 85, requires the Company disclose estimated fair values of financial instruments at least annually.  The recorded value of accounts receivables, related party receivables, related party payables, accounts payable and accrued expenses approximate their fair values based on their short-term nature. The recorded values of long-term debt and liabilities approximate fair value.
 
Income Taxes The Company utilizes “Accounting for Income Taxes,” codified in FASB ASC Topic 740, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that were included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income.  Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.  The statutory corporate income tax rate for foreign enterprises in the PRC was 25% for 2010 and 2011.  IPA China is subject to local income tax rate of 3% for 2010 and 2011.  VGE and IPA BVI are British Virgin Islands international companies and not subject to United States income taxes.  The Company does not have any deferred tax assets or liabilities recorded for the periods covered by the accompanying financial statements due to no significant book to tax basis differences existing.

Revenue Recognition – IPA BVI and IPA China have generated revenues on product shipments. In compliance with SEC Staff Accounting Bulletin (“SAB”) 104 and in accordance with “Revenue Recognition”, codified in FASB ASC Topic 605, IPA recognizes revenue provided (1) persuasive evidence of an arrangement exists, (2) delivery to the customer has occurred, (3) the selling price is fixed or determinable and (4) collection is reasonably assured.  Delivery is considered to have occurred when title and risk of loss have transferred to the customer. The price is considered fixed or determinable when it is not subject to refund or adjustments.  Our standard shipping terms are free on board shipping point.  Some of the Company’s products are sold in the PRC and are subject to Chinese value-added tax.  This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing their finished product.  Revenue is recorded net of VAT taxes.

Cost of Revenues – Cost of revenues consists primarily of material costs, employee compensation, depreciation and related expenses, which are directly attributable to the production of products.  Any write-down of inventory to lower of cost or market is also recorded in cost of revenues.
 
Foreign Currency Translation and Comprehensive Income (Loss) – IPA China’s functional currency is the Renminbi (“RMB”).  For financial reporting purposes, RMB were translated into United States Dollars ("USD") as the reporting currency.   Assets and liabilities are translated at the exchange rate in effect at the balance sheet date.  Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period.   Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders' equity as "Accumulated other comprehensive income".  Gains and losses resulting from foreign currency transactions are included in income. There has been no significant fluctuation in exchange rate for the conversion of RMB to USD after the balance sheet date.  The sales of IPA BVI are in USD.
 
Segment Reporting and Geographic Information – "Disclosures about Segments of an Enterprise and Related Information", codified in FASB ASC Topic 280, requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.  
 
 
 
8

 
 
Net Income (Loss) Per Share - The Company computes net loss per share in accordance with “Earnings per Share”, codified in FASB ASC Topic 260. Under the provisions of this topic, basic and diluted net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of shares of common stock outstanding during the period.

Reclassifications – Certain prior year amounts were reclassified to conform to the manner of presentation in the current period.

NOTE 2 – FIXED ASSETS

Fixed assets are comprised of the following at June 30, 2011 and December 31, 2010:

   
2011
   
2010
 
Building
 
$
782,000
   
$
772,000
 
Machinery and equipment
   
444,000
     
417,000
 
Office equipment
   
77,000
     
77,000
 
Vehicles
   
171,000
     
170,000
 
Total property and equipment
   
1,474,000
     
1,436,000
 
Less: Accumulated depreciation
   
501,000
     
443,000
 
Fixed assets, net
 
$
973,000
   
$
993,000
 
 
Depreciation was $23,000 and $20,000 for the three months ended June 30, 2011 and 2010, respectively.  Depreciation was $44,000 and $39,000 for the six months ended June 30, 2011 and 2010, respectively
   
NOTE 3 – LAND USE RIGHT

Land use right is composed of the following at June 30, 2011 and December 31, 2010:
 
   
2011
   
2010
 
Land use right
 
$
720,000
   
$
720,000
 
Less: Accumulated amortization
   
182,000
     
162,000
 
Land use right, net
 
$
538,000
   
$
558,000
 

Amortization was $10,000 and $11,000 for the three months ended June 30, 2011 and 2010, respectively.  Amortization was $21,000 and $20,000 for the six months ended June 30, 2011 and 2010, respectively.  The amortization for the next five years from June 30, 2011 will be:  2012 - $38,000; 2013 - $32,000; 2014 - $30,000; 2015 - $30,000; and 2016 - $30,000.
   
NOTE 4 – INTANGIBLE ASSETS

License to Grass

VGE acquired IPA China and IPA BVI on October 21, 2008.  IPA China has a worldwide license to cultivate and sell a fast-growing high yield hybrid grass called GKG that has the potential to be used in the production of nonfood biofuels and, in the more immediate term, animal feedstock for dairy cows, pigs, sheep, goats, fish and other animals.  VIASPACE issued 30,576,007 shares to the Licensor of the GKG valued at $507,000 on the date of acquisition.  The grass license is amortized over an estimated useful life of 20 years.  

Amortization was $6,000 for the three months ended June 30, 2011 and 2010 and $13,000 for the six months ended June 30, 2011 and 2010.  The amortization expense for the next five years will be $25,000 in each year.  Amortization expense on the license to grass is charged to additional paid-in capital as opposed to statement of operations since the payment for the license to grass was paid by VIASPACE and not VGE.
 
License to Grass is composed of the following at June 30, 2011 and December 31, 2010:

   
2011
   
2010
 
License to Grass
 
$
507,000
   
$
507,000
 
Less: Accumulated amortization
   
67,000
     
54,000
 
License to Grass, net
 
$
440,000
   
$
453,000
 

Goodwill

VGE acquired IPA China and IPA BVI on October 21, 2008 and recorded goodwill of $12,322,000 related to the acquisition.
 
 
9

 

NOTE 5 – RELATED PARTIES

Other than as listed below, we have not been a party to any significant transactions, proposed transactions, or series of transactions, and in which, to our knowledge, any of our directors, officers, five percent beneficial security holders, or any member of the immediate family of the foregoing persons has had or will have a direct or indirect material interest.

Related Party Receivables

Included in the Company’s consolidated balance sheets at June 30, 2011 and December 31, 2010 are Related Party Receivables and Payables.  The Related Party Receivables and Payables are detailed below.  Sung Hsien Chang is a Director of VIASPACE, President of VGE, and CEO of IPA China and IPA BVI.  JJ International (“JJ”) is a company owned by Sung Hsien Chang that operates separately.  JJ also acts as a distributor of product for VGE.  IPA China recorded revenues of $75,000 from JJ for the six months ended June 30, 2011.   IPA BVI is charging JJ interest income on the outstanding receivable balance at an interest rate of 6%.  For the six months ended June 30, 2011, $22,000 was recorded as interest income to JJ and is included in Other Income in the Company’s Consolidated Statements of Operations. Included in the Due from JJ International amount shown below is $119,000 and $97,000 at June 30, 2011 and December 31, 2010, respectively, representing cumulative interest income charged to JJ.

The following table represents a summary of Related Party Receivables at June 30, 2011 and December 31, 2010:

   
2011
   
2010
 
Due from JJ International
 
$
1,389,000
   
$
1,356,000
 
Due from employee of IPA China
   
6,000
     
21,000
 
Total
 
$
1,395,000
   
$
1,377,000
 

On April 14, 2010, Sung Hsien Chang owed IPA BVI $807,833 including interest for loans and advances.  Mr. Chang repaid IPA BVI on that date by transferring 56,889,650 shares of the common stock of VIASPACE to IPA BVI.  The amount was repaid at fair market value and represented a closing price of VIASPACE common stock of $0.0142 per share.  This amount is shown in other assets on the balance sheet of VGE.
 
Related Party Payables

The following table is a summary of Related Party Payables at June 30, 2011 and December 31, 2010:

   
2011
   
2010
 
Due to employee of IPA China
 
$
1,000
   
$
6,000
 
Due to JJ International
   
24,000
     
17,000
 
Due to Sung Hsien Chang
   
43,000
     
 
Due to Parent
   
29,000
     
9,000
 
Total
 
$
97,000
   
$
32,000
 

NOTE 6 – INCOME TAXES

IPA China is governed by the Income Tax Law of the PRC concerning the private-run enterprises, which are generally subject to tax at a statutory rate of 25% in 2010 and 2011 on income reported in the statutory financial statements after appropriated tax adjustments.  VGE and IPA BVI are BVI international companies and not subject to United States income taxes.
 
NOTE 7 – STOCK INCENTIVE PLAN

On June 2, 2009, the Board of VGE adopted the 2009 Stock Incentive Plan (the “VGE Plan”). The VGE Plan was also approved by the holders of a majority of the Company’s common stock.  The VGE Plan provided for the reservation for issuance under the Plan of 1,400,000 shares of VGE common stock.

The VGE Plan is designed to provide additional incentive to employees, directors and consultants of the Company through the awarding of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock and other awards.   The VGE Board administers the VGE Plan, selects the individuals to whom options will be granted, determines the number of options to be granted, and the term and exercise price of each option.  Stock options granted pursuant to the terms of the VGE Plan generally cannot be granted with an exercise price of less than 100% of the fair market value on the date of the grant.  The term of the options granted under the Plan cannot be greater than 10 years. Options to employees and directors generally vest over a period determined by the VGE Board of Directors.  50,000 shares were available for future grant at June 30, 2011.  There were no stock options issued during the six months ended June 30, 2011.  There were no stock options cancelled during 2011.
 
 
10

 
 
The fair value of each stock option granted is estimated on the date of the grant using the Black-Scholes option pricing model.  The Black-Scholes option pricing model has assumptions for risk free interest rates, dividends, stock volatility and expected life of an option grant.  The risk free interest rate is based upon market yields for United States Treasury debt securities at a maturity near the term remaining on the option. Dividend rates are based on dividend history.  The stock volatility factor is based on the historical volatility of VGE’s stock price.  The expected life of an option grant is based on management’s estimate as no options have been exercised in the Plan to date.  The fair value of each option grant to employees, directors and consultants is calculated by the Black-Scholes method and is recognized as compensation expense on a straight-line basis over the vesting period of each stock option award.  

For stock options issued in 2010, the fair value was estimated at the date of grant using the following range of assumptions:
 
   
2010
 
Risk free interest rate
    3.37%  
Dividends
    0%  
Volatility factor (estimated)
    100.00%  
Expected life
 
6.67 years
 
Annual forfeiture rate (estimated)
    0%  

The following table summarizes activity for employees and directors in VGE’s Plan at June 30, 2011:
 
   
Number of
Shares
   
Weighted-
Average
Exercise
Price Per
Share
   
Weighted-
Average
Remaining
Contractual
Term In
Years
   
Aggregate
Intrinsic
Value
 
Outstanding at December 31, 2010
   
1,350,000
   
$
0.80
             
Granted
   
     
             
Exercised
   
     
             
Forfeited
   
     
             
Outstanding at June 30, 2011
   
1,350,000
   
$
0.80
     
9.0
   
$
 
Exercisable at June 30, 2011
   
675,000
   
$
0.80
     
9.0
   
$
 
 
There were no stock options issued in the VGE Plan in 2011. The Company recorded $222,000 of compensation expense under the VGE Plan for employee and director stock options for the six months ended June 30, 2011.  At June 30, 2011, there was $334,000 of unrecognized compensation costs related to non-vested share-based compensation arrangements under the VGE Plan that is expected to be recognized over a weighted average period of approximately one year.  At June 30, 2011, the fair value of options vested for employees and directors was $675,000.  There were no options exercised during 2011.
 
NOTE 8 – NET LOSS PER SHARE

The Company computes net loss per share in accordance with FASB ASC Topic 260.  Under its provisions, basic loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the periods presented.  Diluted earnings would customarily include, if dilutive, potential shares of common stock issuable upon the exercise of stock options and warrants.  The dilutive effect of outstanding stock options and warrants is reflected in earnings per share in accordance with FASB ASC Topic 260 by application of the treasury stock method.  For the periods presented, the computation of diluted loss per share equaled basic loss per share as the inclusion of any dilutive instruments would have had an antidilutive effect on the earnings per share calculation in the periods presented.
 
The following table sets forth common stock equivalents (potential common stock) for the three and six months ended June 30, 2011 and 2010.  Common stock equivalents shown for 2011 are included in the income per share calculation.  Common stock equivalents shown for 2010 are not included in the loss per share calculation since their effect would be anti-dilutive for the periods indicated:

   
2011
   
2010
 
Stock Options
   
1,350,000
     
1,350,000
 

 
 
11

 
 
The following table sets forth the computation of basic and diluted net income (loss) per share for the three months and six months ended June 30, 2011 and 2010 (unaudited), respectively:
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Basic and diluted net income (loss) per share:
                       
Numerator:
                       
Net income (loss) attributable to common stock
 
$
393,000
   
$
(222,000
)
 
$
59,000
   
$
(225,,000
)
Denominator:
                               
Weighted average shares of common stock outstanding
   
9,950,000
     
8,600,000
     
9,950,000
     
8,600,000
 
Net income (loss) per share of common stock, basic and diluted
 
$
0.03
   
$
(0.03
)
 
$
*
   
$
(0.03
)
 

*  Less than $0.01 per share
 
 
NOTE 9 – OTHER COMMITMENTS AND CONTINGENCIES

Leases

The Company currently has no long term office lease.  Leases on land in the PRC is discussed in Note 1 and Note 3.

Operations in the PRC

IPA China’s operations in the PRC are subject to considerations and risks not typically associated with companies in the North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
 
IPA China’s sales, purchases and expenses transactions are denominated in RMB and all of IPA China’s assets and liabilities are also denominated in RMB. The RMB is not freely convertible into foreign currencies under current law. In China, foreign exchange transactions are required by law to be transacted only by authorized financial institutions. Remittances in currencies other than RMB may require certain supporting documentation in order to affect the remittance.
 
IPA art designers work with buyers from retail chains to choose prints and other art forms from catalogs of licensed work. We only purchase prints from companies with whom we have long-standing relationships, and we guarantee our customers there are no counterfeits and that all royalties have been paid.  The vendors from whom we purchase prints guarantee to us that all of the prints they are selling are not counterfeits and that all royalties have been paid to the artist of the prints.  We then pass this guarantee on to our customers.  Since the time IPA was formed in 2003, we have not received any legal claims challenging any of the prints we have sold.
 
Employment Agreements

On May 14, 2010, VGE entered into two-year employment agreements with each of Carl Kukkonen, Sung Hsien Chang and Stephen Muzi.  Dr. Kukkonen would serve as Chief Executive Officer of VGE, Mr. Chang as President of VGE, and Mr. Muzi as Chief Financial Officer, Treasurer and Secretary of VGE.  Dr. Kukkonen and Mr. Chang would receive a salary of $240,000 per annum and Mr. Muzi would receive $180,000 per annum.  For the first 12 months, Messrs. Kukkonen and Muzi would be paid by VIASPACE.  The remainder of the employment term they would be paid in cash.  Each of them would be entitled to a bonus as determined by the VGE Board of Directors, customary insurance and health benefits, 20 business days paid leave per year, and reimbursement for out-of-pocket expenses in the course of his employment.  

On May 16, 2011, Dr. Kukkonen and Mr. Muzi each entered into an Amendment to Senior Executive Employment Agreement (the “Amendment”) with VIASPACE and VGE. Both Amendments changed the responsibility of payment in the second year of the Employment Agreement from VGE to VIASPACE.  All other terms remained the same.
 
 
12

 

Litigation

The Company is not party to any material legal proceedings at the present time.

NOTE 10 — OPERATING SEGMENTS

The Company evaluates its reportable segments in accordance with FASB ASC Topic 280 “Disclosures about Segments of an Enterprise and Related Information”. As of June 30, 2011, the Company’s Chief Executive Officer, Dr. Carl Kukkonen, was the Company’s Chief Operating Decision Maker (“CODM”) pursuant to FASB ASC Topic 280.  The CODM allocates resources to the segments based on their business prospects, product development and engineering, and marketing and strategy.

The Company operates in two reportable segments:
 
Framed-Artwork Segment:
 
 
(i)
IPA China and IPA BVI:  Specialize in manufacturing high-quality, copyrighted, framed artwork in the PRC which is sold to retail stores in the US.
 
Grass Segment:

 
(i)
VGE (but not including operations of its subsidiaries, IPA China and IPA BVI):  VGE grows a fast-growing, high yield, low carbon, nonfood energy crop called GKG in the PRC.  GKG can be burned in 100% biomass power plants to generate electricity; made into pellets that can be burned together with coal to reduce carbon emissions from existing power plants; generate bio methane through anaerobic digestion, and can be used as a feedstock for low carbon liquid biofuels for transportation.  GKG can also be used as animal feed.
 
The accounting policies of the reportable segments are described in the summary of significant accounting policies (see Note 1 to these financial statements).  The Company evaluates segment performance based on income (loss) from operations excluding infrequent and unusual items.

The amounts shown as “Corporate Administrative Costs” consist of unallocated corporate-level operating expenses.  In addition, the Company does not allocate other income/expense, net to reportable segments.

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Revenues:
                       
Framed-Artwork
 
$
2,775,000
   
$
620,000
   
$
3,312,000
   
$
1,377,000
 
Grass
   
3,000
     
     
     
 
Total
 
$
2,778,000
   
$
620,000
   
$
3,312,000
   
$
1,377,000
 
                                 
Income (Loss) From Operations:
                               
Framed-Artwork
 
$
708,000
   
$
18,000
   
$
722,000
   
$
119,000
 
Grass
   
(372,000
)
   
(254,000
)
   
(738,000
)
   
(481,000
)
Income (Loss) From Operations
 
$
336,000
   
$
(236,000
)
 
$
(16,000
)
 
$
(362,000
)

 
    December 31,  
   
2011
   
2010
 
Assets:
           
Framed-Artwork
 
$
4,821,000
   
$
4,046,000
 
Grass
   
684,000
     
753,000
 
VGE Corporate
   
12,762,000
     
12,775,000
 
Total Assets
 
$
18,267,000
   
$
17,574,000
 

For the three months ended June 30, 2011 and 2010, the Company had one customer which made up 96% and 92%, respectively, of our total revenues.  For the six months ended June 30, 2011 and 2010, the Company had one customer which made up 91% and 85%, respectively, of our total revenues.

 
13

 

NOTE 11 – FINANCIAL ACCOUNTING DEVELOPMENTS

In April 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-13, Compensation – Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. This update provides amendments to Accounting Standards Codification (ASC) Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The amendments in this update should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings. The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the fiscal year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award. The cumulative-effect adjustment should be presented separately. Earlier application is permitted. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This update amends codification Topic 310 on receivables to improve the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate by portfolio segment or class certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. This guidance is being phased in, with the new disclosure requirements for period end balances effective as of December 31, 2010, and the new disclosure requirements for activity during the reporting period are effective March 31, 2011. The troubled debt restructuring disclosures in this ASU have been delayed by ASU 2011-01 Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20, which was issued in January 2011.

In December 2010, FASB issued ASU No. 2010-28, Intangibles – Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The amendments in this update affect all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. The amendments in this update modify Step 1 so that for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. Upon adoption of the amendments, any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to retained earnings beginning in the period of an adoption. Any goodwill impairments occurring after the initial adoption of the amendments should be included in earnings. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In December 2010, FASB issued ASU No. 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company adopted the disclosure requirements for the business combinations in 2011.
 
In May 2011, FASB issued additional guidance on fair value disclosures. This guidance contains certain updates to the measurement guidance as well as enhanced disclosure requirements. The most significant change in disclosures is an expansion of the information required for “Level 3” measurements including enhanced disclosure for: (1) the valuation processes used by the reporting entity; and (2) the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs, if any. This guidance is effective for interim and annual periods beginning on or after December 15, 2011, with early adoption prohibited. The Company does not have any “Level 3” disclosures.

In June 2011, the FASB issued guidance on the presentation of comprehensive income. This guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. The guidance allows two presentation alternatives: (1) present items of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income; or (2) in two separate, but consecutive, statements of net income and other comprehensive income. This guidance is effective as of the beginning of a fiscal year that begins after December 15, 2011. Early adoption is permitted, but full retrospective application is required under both sets of accounting standards. The Company is currently evaluating which presentation alternative it will utilize.
 
 
14

 
 
ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following discussion contains certain statements that constitute “forward-looking statements”.   Such statements appear in a number of places in this Report, including, without limitation, “Management’s Discussion and Analysis of Financial Condition or Plan of Operation.”  These statements are not guarantees of future performance and involve risks, uncertainties and requirements that are difficult to predict or are beyond our control.  Our future results may differ materially from those currently anticipated depending on a variety of factors, including those described below under “Risks Related to Our Future Operations” and our filings with the Securities and Exchange Commission.  The following should be read in conjunction with the unaudited Consolidated Financial Statements and notes thereto that appear elsewhere in this Report and in conjunction with our 2010 Annual Report on Form 10-K as filed with the SEC.

Overview

VIASPACE Green Energy Inc., a British Virgin Islands (“BVI”) international business company (“we”, “us”, “VGE” or the “Company”) is the parent company of Inter Pacific Arts Corporation, a BVI international business company (“IPA BVI”) and Guangzhou Inter Pacific Arts, a Peoples Republic of China (“PRC” or “China”) company (“IPA China”).  IPA China is a wholly-owned foreign enterprise headquartered in Guangdong province of China.  IPA BVI owns all equity interests of IPA China.  IPA BVI and IPA China specialize in the manufacturing of high quality, copyrighted, framed artwork sold in US retail chain stores. IPA China also has a sublicense to a fast-growing, high yield, low carbon, nonfood energy crop called Giant KingTM Grass (“GKG”) which can be burned in 100% biomass power plants to generate electricity; made into pellets that can be burned together with coal to reduce carbon emissions from existing power plants; generate bio methane through anaerobic digestion, and can be used as a feedstock for low carbon liquid biofuels for transportation, biochemicals and bio plastics.  Cellulosic ethanol, bio butanol and other liquid biofuels, collectively called “Grassoline,” do not use corn or other food sources as feedstock.  GKG can also be used as animal feed.  GKG and other plants absorb and store carbon dioxide from the atmosphere as they grow. When they are burned, they release the carbon dioxide back into the atmosphere, but it is the same carbon dioxide that was removed from the atmosphere, and that the process is approximately carbon neutral. Small amounts of fossil fuel are used by the farm equipment, transportation of  GKG and fertilizer, so that the overall process of growing and burning GKG probably has some net carbon dioxide emissions, but much lower emissions than burning coal or other fossil fuels directly to create the same amount of energy.   GKG has been independently tested by customers and been shown to have satisfactory energy content, high bio methane production, and high potential for biofuels and biochemicals.

We are growing GKG on approximately 280 acres of leased land in China to serve as a nursery to provide seedlings for large bioenergy projects, a demonstration plantation for potential partners and customers to visit, to provide samples for testing by potential customers, and as a grass source for our own Green LogTM product.   VGE is headquartered in California with business activities in China.

As of June 30, 2011 and December 31, 2010, VIASPACE Inc. (“VIASPACE” or “Parent”) owns 75.6% and 75.7%, respectively, of the outstanding common shares of VGE.  

The Company’s web site is www.VIASPACEGreenEnergy.com.   Information contained on, or accessible through, our website should not be deemed as part of this quarterly report.

Critical accounting policies and estimates

Financial Reporting Release No. 60, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies” (“FRR60”) issued by the SEC, suggests companies provide additional disclosure and commentary on those accounting policies considered most critical.  FRR 60 considers an accounting policy to be critical if it is important to the Company’s financial condition and results of operations, and requires significant judgment and estimates on the part of management in its application.  For a summary of the Company’s significant accounting policies, including the critical accounting policies discussed below, see the accompanying notes to the consolidated financial statements.

The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of expenses during the reporting period.  On an ongoing basis, the Company evaluates its estimates, which are based on historical experience and on various other assumptions believed to be reasonable under the circumstances.  The result of these evaluations forms the basis for making judgments about the carrying values of assets and liabilities and the reported amount of expenses not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions.  The accounting policies discussed below require significant management judgments and estimates.
 
 
15

 
 
IPA BVI and IPA China have generated revenues on product shipments. In accordance with SEC Staff Accounting Bulletin No. 104, “Revenue Recognition”, codified in FASB ASC Topic 605, IPA recognizes product revenue provided (1) persuasive evidence of an arrangement exists, (2) delivery to the customer has occurred, (3) the selling price is fixed or determinable and (4) collection is reasonably assured.  Delivery is considered to have occurred when title and risk of loss have transferred to the customer. The price is considered fixed or determinable when it is not subject to refund or adjustments.  Our standard shipping terms are free on board shipping point.  Some of the Company’s products are sold in the PRC and are subject to Chinese value-added tax.  This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing their finished product.  Revenue is recorded net of VAT taxes.

The Company bases its estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities not readily apparent from other sources.  There is no assurance actual results will not differ from these estimates.

See footnotes in the accompanying financial statements regarding recent financial accounting developments.
 
Results of Operations

Three Months Ended June 30, 2011 Compared to June 30, 2010

Revenues

Revenues were $2,778,000 and $620,000 for the three months ended June 30, 2011 and 2010, respectively, an increase of $2,158,000, due to increased customer orders and demand for artwork.  Approximately $2,775,000 of revenues recorded during the three months ended June 30, 2011 are from framed artwork sales and $3,000 of revenues are from grass sales.  All revenues in 2010 were from the framed artwork sales.
 
Cost of Revenues

Cost of revenues were $1,906,000 and $407,000 for the three months ended June 30, 2011 and 2010, respectively, an increase of $1,499,000, due to increased customer orders from framed artwork.

Gross Profit

The resulting effect on these changes in revenues and cost of revenues for the three months ended June 30, 2011 compared to the same period in 2010 was an increase in gross profit from $213,000 for the three months ended June 30, 2010 to $872,000 for the three months ended June 30, 2011, an increase of $659,000.

Operations Expenses

Operations expenses were $56,000 and $28,000 for the three months ended June 30, 2011 and 2010, respectively, an increase of $28,000.  The increase is primarily due to operations expenses incurred by VGE in the production of its GKG in China.  This includes operating costs for salaries, equipment, maintenance, utilities and fuel costs.  The Company expects operations expenses for VGE to increase in the future as more expenditures are incurred to grow, harvest and produce GKG. 

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $480,000 and $421,000 for the three months ended June 30, 2011 and 2010, respectively, an increase of $59,000.  
 
Framed Artwork Segment
Of the total amounts, the framed artwork segment had selling, general and administrative expenses of $167,000 and $195,000 for the three months ended June 30, 2011 and 2010, respectively, a decrease of $28,000 primarily due to lower legal fees in 2011.  

Grass Segment
Of the total amounts, the grass segment related to growing GKG in the PRC had selling, general and administrative expenses of $313,000 and $226,000 for the three months ended June 30, 2011 and 2010, respectively, an increase of $87,000.  Payroll and benefits increased $66,000 in the three months ended June 30, 2011 due to higher compensation levels in 2011.  Travel expenses increased $15,000 in the three months ended June 30, 2011 due to increased travel related to business development of the grass business in 2011.  Other selling, general and administrative expenses, net, increased by $6,000 during the three months ended June 30, 2011 compared to the same period in 2010.
 
 
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Income (Loss) from Operations

The resulting effect on these changes in gross profits, operations expenses and selling, general and administrative expenses was a decrease in the loss from operations from $236,000 for the three months ended June 30, 2010 to income from operations of $336,000 for the three months ended June 30, 2011, an improvement of $572,000.

Framed Artwork Segment
Of the total amounts, the framed artwork segment had increased income from operations of $690,000 for the three months ended June 30, 2011 compared to the same period in 2010.
 
Grass Segment
Of the total amounts, the grass segment had an increased loss from operations of $118,000 for the three months ended June 30, 2011 compared to the same period in 2010.

Other Income (Expense), Net

Other Income

Other income decreased $10,000 for the three months ended June 30, 2011 compared to the same period in 2010, primarily due to lower interest income being recorded on the amounts owed to the Company by Sung Hsien Chang and JJ International.
   
Six Months Ended June 30, 2011 Compared to June 30, 2010

Revenues

Revenues were $3,312,000 and $1,377,000 for the six months ended June 30, 2011 and 2010, respectively, an increase of $1,935,000, due to increased customer orders and demand for artwork.  Approximately $3,309,000 of revenues recorded during the six months ended June 30, 2011 are from framed artwork sales and $3,000 of revenues are from grass sales.  All revenues in 2010 were from the framed artwork sales.
 
Cost of Revenues

Cost of revenues were $2,323,000 and $939,000 for the six months ended June 30, 2011 and 2010, respectively, an increase of $1,384,000, due to increased customer orders from framed artwork.

Gross Profit

The resulting effect on these changes in revenues and cost of revenues for the six months ended June 30, 2011 compared to the same period in 2010 was an increase in gross profit from $438,000 for the six months ended June 30, 2010 to $989,000 for the six months ended June 30, 2011, an increase of $551,000.

Operations Expenses

Operations expenses were $86,000 and $49,000 for the six months ended June 30, 2011 and 2010, respectively, an increase of $37,000.  The increase is primarily due to operations expenses incurred by VGE in the production of its GKG in China.  This includes operating costs for salaries, equipment, maintenance, utilities and fuel costs.  The Company expects operations expenses for VGE to increase in the future as more expenditures are incurred to grow, harvest and produce GKG. 

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $919,000 and $751,000 for the six months ended June 30, 2011 and 2010, respectively, an increase of $168,000.  
 
Framed Artwork Segment
Of the total amounts, the framed artwork segment had selling, general and administrative expenses of $270,000 and $319,000 for the six months ended June 30, 2011 and 2010, respectively, a decrease of $49,000 primarily due to lower legal fees in 2011.  

Grass Segment
Of the total amounts, the grass segment related to growing GKG in the PRC had selling, general and administrative expenses of $649,000 and $432,000 for the six months ended June 30, 2011 and 2010, respectively, an increase of $217,000.  Stock option compensation expense increased $111,000 for the six months ended June 30, 2011 as compared with the same period in 2010 since April 2010 was the start of stock option expense for the Company.  Payroll and benefits increased $89,000 in the six months ended June 30, 2011 due to higher compensation levels in 2011.  Travel expenses increased $18,000 in the six months ended June 30, 2011 due to increased travel related to business development of the grass business in 2011.  Other selling, general and administrative expenses, net, decreased by $1,000 during the six months ended June 30, 2011 compared to the same period in 2010.
 
 
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Income (Loss) from Operations

The resulting effect on these changes in gross profits, operations expenses and selling, general and administrative expenses was a decrease in the loss from operations from $362,000 to $16,000 for the six months ended June 30, 2010 and 2011, respectively, 2011, an improvement of $346,000.

Framed Artwork Segment
Of the total amounts, the framed artwork segment had increased income from operations of $603,000 for the six months ended June 30, 2011 compared to the same period in 2010.
 
Grass Segment
Of the total amounts, the grass segment had an increased loss from operations of $257,000 for the six months ended June 30, 2011 compared to the same period in 2010.

Other Income (Expense), Net

Other Income

Other income decreased $115,000 for the six months ended June 30, 2011 compared to the same period in 2010, primarily due to lower interest income being recorded on the amounts owed to the Company by Sung Hsien Chang and JJ International.

Liquidity and Capital Resources

The Company’s net income for the six months ended June 30, 2011 was $6,000.   Non-cash expenses totaled $288,000 for the six months ended June 30, 2011 primarily due to stock option compensation.  Related party receivables and payables, net, generated $66,000 of cash for the six months ended June 30, 2011.  Working capital provided $145,000 in 2011.  Net cash provided by operating activities was $505,000 for the six months ended June 30, 2011.  
 
Net cash used in investing activities was $24,000 for 2011.  This is primarily for capital expenditures incurred by VGE in purchasing equipment for its GKG business.

The Company expects cash on hand as of June 30, 2011 and future operating cash flow to fund operations for a minimum of the next twelve months, and as such, the Company has no immediate need for additional outside financing.  However, if revenue forecasts are not met or if future operating expenses or capital requirements increase beyond our control; the Company may need to seek additional cash resources through the sale of equity securities or debt securities.

Contractual Obligations

The Company does not have any other major outstanding contractual obligations except for the following:

Employment Agreements

On May 14, 2010, VGE entered into two-year employment agreements with each of Carl Kukkonen, Sung Hsien Chang and Stephen Muzi.  Dr. Kukkonen would serve as Chief Executive Officer of VGE, Mr. Chang as President of VGE, and Mr. Muzi as Chief Financial Officer, Treasurer and Secretary of VGE.  Dr. Kukkonen and Mr. Chang would receive a salary of $240,000 per annum and Mr. Muzi would receive $180,000 per annum.  For the first 12 months, Messrs. Kukkonen and Muzi would be paid by VIASPACE.  The remainder of the employment term they would be paid in cash.  Each of them would be entitled to a bonus as determined by the VGE Board of Directors, customary insurance and health benefits, 20 business days paid leave per year, and reimbursement for out-of-pocket expenses in the course of his employment.  

On May 16, 2011, Dr. Kukkonen and Mr. Muzi each entered into an Amendment to Senior Executive Employment Agreement (the “Amendment”) with VIASPACE and VGE. Both Amendments changed the responsibility of payment in the second year of the Employment Agreement from VGE to VIASPACE.  All other terms remained the same.

Inflation and Seasonality

We have not experienced material inflation during the past five years.  Seasonality has historically not had a material effect on our operations.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements as of June 30, 2011.   

 
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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk. Our exposure to interest rate risk primarily relates to interest income generated by cash invested in liquid investments with original maturities of three months or less. Such interest-earning instruments carry a degree of interest rate risk. We have not used any derivative financial instruments to manage our interest rate exposure. We have not been exposed to material risks due to changes in interest rates. However, our future interest income may be lower than expected due to changes in market interest rates.

Foreign Exchange Risk. Although we use US dollars as our reporting currency and our artwork revenue is denominated in US dollars, our operations are carried out in RMB and we maintain RMB denominated bank accounts. We, therefore, are subject to currency risk. Although the conversion of the RMB is highly regulated in China, the value of the RMB against the value of the US dollar or any other currency nonetheless may fluctuate in value within a narrow band against a basket of certain foreign currencies. China is currently under significant international pressures to liberalize this government currency policy, and if such liberalization were to occur, the value of the RMB could appreciate or depreciate against the US dollar. Unfavorable changes in the exchange rate between the RMB and the US dollar may result in a material effect upon accumulated other comprehensive income recorded as a charge in shareholders’ equity. We do not use derivative instruments to reduce our exposure to foreign currency risk.

In addition, the RMB is not a freely convertible currency. IPA China, our Chinese subsidiary, is not permitted to pay outstanding current account obligations in foreign currency, but rather must present the proper documentation to a designated foreign exchange bank. We cannot guarantee that all future local currency can be repatriated.

Inflation. Although China has experienced an increasing inflation rate, inflation has not had a material impact on our results of operations during 2011 and 2010.
 
ITEM 4.  CONTROLS AND PROCEDURES

Disclosure controls and procedures.  Disclosure controls are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.  Disclosure controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.  Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity’s disclosure objectives.  The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures.  These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors, mistakes or intentional circumvention of the established processes.

At the end of the period covered by this report and at the end of each fiscal quarter therein, the Company’s management, with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective at the reasonable assurance level described above as of the end of the period covered in this report.

Changes in internal controls over financial reporting.  Management, with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, has evaluated any changes in the Company’s internal control over financial reporting that occurred during the most recent fiscal quarter.  Based on that evaluation, management, the Chief Executive Officer and the Chief Financial Officer of the Company have concluded that no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the fiscal quarter ended June 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.  The Company is a non-accelerated filer.  
 
 
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PART II – OTHER INFORMATION
 
ITEM 1.  LEGAL PROCEEDINGS

The Company does not have any material legal proceedings as of June 30, 2011.

ITEM 1A.  RISK FACTORS

Risk Factors Which May Affect Future Results

The Company cautions that the following important factors, among others, in some cases have affected and in the future could affect the Company’s actual results and could cause such results to differ materially from those expressed in forward-looking statements made by or on behalf of the Company.

There have been no material changes to the risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, other than as set forth below:

Risks Related To Our Business

Our revenues to date have been to one customer, the loss of which could result in a severe decline in revenues.

For the six months ended June 30, 2011 and 2010, the Company had one customer which made up 91% and 85%, respectively, of our total revenues.  We believe that this trend of revenues to one customer will continue in the near future.  A loss of any customer by the Company, and in particular, our leading customer, could significantly reduce recognized revenues.

Any future sale of a substantial number of shares of our common stock could depress the trading price of our common stock, lower our value and make it more difficult for us to raise capital.

Any sale of a substantial number of shares of our common stock (or the prospect of sales) may depress the price of our common stock.  In particular, we anticipate that the issuance of newly-issued shares to Chang in connection with an alternate arrangement to enable us to hold interests in IPA BVI and IPA China may be very dilutive.  In addition, these sales could lower our value and make it more difficult for us to raise capital.  Further, the timing of the sale of the shares of our common stock may occur at a time when we would otherwise be able to obtain additional equity capital on terms more favorable to us.

The Company has 50,000,000 authorized shares of common stock, of which 8,600,000 were issued and outstanding as of June 30, 2011.  Of these issued and outstanding shares, 6,504,000 shares, or 75.6% of outstanding shares are owned by VIASPACE Inc.  The VGE shares owned by VIASPACE are pledged as collateral related to the secured debt owed by VIASPACE to Chang for the acquisition of IPA BVI and IPA China by VIASPACE and VGE on October 21, 2008.  400,000 shares of the Company are currently beneficially owned by Mr. Sung Hsien Chang, our President and director.  Other executive officers and directors do not own any Company shares that are issued and outstanding.  A total of 965,800 shares of the Company’s outstanding common stock are accounted for by our transfer agent as free trading shares at June 30, 2011.  A total of 7,634,200 shares of the Company’s outstanding common shares are accounted for as restricted under Rule 144.  These shares could be released in the future if requested by the holder of the shares, subject to volume and manner of sale restrictions under Rule 144.  

We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of shares of our common stock will have on the market price of our common stock.  Sales of substantial amounts of our common stock (including shares currently held by management and principal shareholders), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock.

If VIASPACE cannot make the cash payment due to Chang on May 14, 2012, or some other alternate arrangement is not reached, then Chang could greatly increase his ownership in our equity securities and have greater influence on shareholder actions.

On May 14, 2010, VIASPACE entered into a secured Note with Sung Hsien Chang and must pay Chang $5,331,025 over a five-year period.  The secured note was amended by VIASPACE on May 16, 2011.  Interest accrues at 6%.  The principal must be repaid in five equal installments of $1,066,205 on the second through sixth anniversary of the issuance date. The first payment is due May 14, 2012.  Chang may elect to receive payments in cash or VIASPACE equity securities. The Note is secured by certain assets of VIASPACE, including all securities of VGE held by VIASPACE.  The Note is also secured by the assets of VGE, IPA BVI and IPA China.  The Note may be accelerated upon an event of default under the note which includes failure to repay any amount owed, or breach of certain representations, warranties and covenants. The Note also includes various affirmative covenants, including legal compliance and insurance maintenance; and negative covenants, including VIASPACE maintaining a net worth of $5 million on a consolidated basis.  If VIASPACE is ultimately unable to make this cash payment, or some other alternate arrangement is not reached, VIASPACE would be required to transfer all of the shares of VGE it holds to Chang.  This would cause Mr. Chang to have greater influence on shareholder decisions.
 
 
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ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4.  SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

None.
 
ITEM 5.  OTHER INFORMATION

None.

ITEM 6.  EXHIBITS

(a) Exhibits

31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
32
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. *
101.INS
XBRL Instance Document
101.SCH
XBRL Schema Document
101.CAL
XBRL Calculation Linkbase Document
101.DEF
XBRL Definition Linkbase Document
101.LAB
XBRL Label Linkbase Document
101.PRE
XBRL Presentation Linkbase Document
 
*  Filed herewith.
   
[SIGNATURES PAGE FOLLOWS]
  
 
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SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
VIASPACE GREEN ENERGY INC.
(Registrant)
 
       
Date: August 12, 2011
By:
/s/ CARL KUKKONEN
 
   
Carl Kukkonen
 
   
Chief Executive Officer
 
       
       
Date:  August 12, 2011
By:
/s/ STEPHEN J. MUZI
 
   
Stephen J. Muzi
 
   
Chief Financial Officer
 
 
 
 
 
 
 
 
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